Strategist Valliere: Economy’s Fundamentals ‘Extremely Good’

Greg Valliere, at the FSI conference, said, "There was no fiscal cliff, there will be no government shutdown, there will be no debt default and the world according to the Mayan calendar did not happen.

By John Sullivan|January 29, 2013 at 10:08 AM

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Greg Valliere speaking at FSI OneVoice in San Diego on Monday.

“I am very upbeat. The clouds are lifting.”

Red meat was on the menu Monday afternoon at FSI’s OneVoice Conference in San Diego, as Greg Valliere delivered a generally upbeat assessment of the political environment and its impact on the economy this year.

However, Valliere, chief political strategist with Potomac Research Group and a contributor to CNBC, did note that “I’ve been introduced recently as a Washington insider, which has made me made me nervous; I was afraid people would throw things at me.”

Blaming much of the sensationalism surrounding high profile issues on “the media,” he noted that later in February, “We will hear about sequestration. I’m probably biting the hand that feeds me but I believe the media would put rooster fighting on TV if it got ratings. There was no fiscal cliff, there will be no government shutdown, there will be no debt default and the end of the world according to the Mayan calendar did not happen.”

He implored attendees to focus on the fundamentals, which he said look “extremely good.”

“GDP is growing,” he argued in rapid succession. “Unemployment is down and I predict it will be at 7% by the end of the year. Corporate balance sheets are the greatest in our lifetime. State budgets are also great (except for Illinois and California). Housing is great. The automobile sector is great. Manufacturing, who would have believed, is coming back. And in the energy sector, we are actually on track to be self-sufficient.

Balancing his enthusiasm with some pessimism, Valliere did say incoming SEC Chairwoman Mary Jo White “will not help the regulatory story.”

“She was a tough prosecutor and I think her role will be adversarial with the industry. It’s reflective of the administration as a whole. With Geithner gone and Jake Lew coming in, who is more of a traditional liberal Democrat, it will be tough for the industry and FSI.”

Turning to the fiscal situation, Valliere said he believed tax increases would not occur for the foreseeable future. If it does happen, he said that any tax reform would be revenue neutral, but that the chances of it happening at all were below 50%.

He also said he believed any kind of deficit reduction legislation would not happen for the following reasons:

“There is no leadership. The president is not a very good negotiator. He has spoken with Nancy Pelosi and Harry Reid maybe seven times this year. Bill Clinton would talk to Congress seven times a day. LBJ would talk to them from the bathroom. What does it say about the negotiating climate in Washington when Joe Biden was the best negotiator of the past two months?”

“Markets are fat and happy due to the policies of the Fed and as a result are not demanding deficit reduction. The Fed will remain accommodative for a very long time. Even when Ben Bernanke retires, he will be replaced by someone even more dovish, most likely Janet Yellen.”

“Nobody knows what prescription we should take. They couldn’t even reform the post office last summer. What makes anyone think some kind of reform will happen without the markets demanding it?”

Noting that many of his Republican friends and colleagues were disappointed with the election and the direction of the party, he offered a number of areas in which they can take heart.

“Consider the following: 98% of the Bush tax cuts were preserved,” he said. “Also, believe it or not the budget deficit is falling and falling fast. The deficit as a percentage of GDP is currently 6% and could soon be at 3%, the historical average since World War II. The dollar amount is still high but as a percentage of GDP it is falling.”

He also noted that a “culture of spending restraint has taken hold, not so much austerity, but restraint.”

Continuing resolutions on spending will continue, he added, which means spending will remain flat.

“Solyndra put the brakes on any major new spending initiatives,” he said.

Turning to the next presidential election cycle, he noted that Hillary Clinton has had health problems, which makes one wonder if the concussion she recently suffered was more serious than reported.

“If Hillary doesn’t run, the only person they have left is Joe Biden; there’s no one else after that. The only other person that might be a possibility is Elizabeth Warren. She might have a shot in Iowa, which has a history of reporting the extremes on both the left and right. Remember, it was Michelle Bachmann that won the Republican straw poll.”

By contrast, on the Republican side, he believes Marco Rubio is the strongest possibility at the moment, and that the “bench is deep.”

Tempering his enthusiasm a bit further, he said the one thing that was keeping him up at night was the situation between Israel and Iran.

“Iran could have a crude bomb by this summer. Israel could move in 2013. The only thing preventing some sort of military action will be another effective computer virus that would shut Iran’s nuclear program down.”

“But with the exception of Israel and Iran,” Valliere concluded, “I think it will be a good year.”

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